Roblox's (RBLX 1.35%) stock has been in the limelight lately after plunging more than 20% following its second-quarter 2023 earnings announcement. While Roblox's 15% revenue growth in the quarter was nothing to be ashamed of, investors were disappointed by the decline in the growth rate compared to the 22% top-line growth in the first quarter of 2023.
Still, digging further into the result reveals other positive factors that investors should know before giving up on the company.
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It sustained improvement on critical metrics
Roblox had a busy time growing its business when the pandemic hit in 2020, with revenue growing at high double-digit (and even triple-digit) growth rates. However, the boom turned into a bust as users returned to school and work post-reopening. As a result, revenue growth fell to a low of just 2% in the third and fourth quarters of 2022. Understandably, most investors turned pessimistic.
When Roblox reported its Q1 2023 results, investors breathed a sigh of relief -- revenue growth rate recovered to 22%, indicating that the worst might be over. But before they became optimistic again, Roblox's lower growth rate of 15% in Q2 2023 shattered their hopes of a quick recovery.
Still, investors should look beyond the revenue number to better gauge Roblox's recovery. One factor is that user engagement came in strong during the quarter. For example, average daily active users (DAUs) grew 25% year over year to 65.5 million, and hours engaged jumped 24% to 14 billion hours. An improved engagement level means that Roblox had no problem attracting new users and keeping existing users engaged on its platform.
Another leading indicator of Roblox's sustained recovery is the growth in bookings, up 22% year over year, comparable to the 23% improvement in Q1 2023. Increased bookings mean that users were spending more money on Roblox's platform. Personally, I prefer to watch bookings rather than revenue, as the latter gets distorted by accounting rules.
If Roblox can sustain the improvements in engagement and bookings, it remains on track for its recovery.
It's been delivering positive operating cash flow
Another major complaint investors have about Roblox is its expanding net losses. In Q2 2023, net losses increased by 60% to $283 million. Roblox's massive investment in areas like infrastructure and safety and research and development meant that even as revenue expanded, expenses grew even faster.
While nobody likes an unprofitable business, investors should remember that Roblox is a growth company that will naturally require significant investments to keep growth coming. Fortunately, although the company was unprofitable, it still generated positive cash flow from its operations. For perspective, it has continuously delivered positive operating cash flow over the last 13 quarters.
In other words, the management team has been closely managing its cash flow over the years. In some ways, it has invested within its means to capture as many growth opportunities as possible. Besides, it has a solid balance sheet with $2 billion in cash and cash equivalents and investments (net of debts).
Still, investors should track Roblox's net losses closely in the coming months. Any unexpected surge in net losses, significant fall in operating cash flow, or massive decline in cash hoard is a red flag to catch. After all, while Roblox is a growth company that will naturally consume cash, it must do it sustainably.
As long as Roblox maintains its discipline when investing in growth, investors should not be overly concerned about the accounting losses.
What it means for investors
Overall, Roblox's result wasn't that bad, even though it did not meet most investors' expectations. Bookings improved during the quarter, and engagement continued to grow compared to last year.
Investors should monitor these two metrics in the coming quarters. As long as Roblox can sustain this trend, it is heading in the right direction. Of course, it should do it without incurring more losses. Investors should watch these metrics before giving up on the stock.
